Stated Preference & Experimental Markets

1. Stated Preference & Experimental Markets Methods for measuring non-market benefits

2. Today’s Menu • Constructed market approaches • Designing a CVM survey • Conducting an experiment

3. Recall revealed preference • Remember, our first choice is always to use “revealed preference” approaches to value environmental assets. • What if value (or part of value) can’t be captured within an existing market? • Answer: use “constructed market” methods

4. What are constructed market methods? • Stated preference methods • More generally known as “Contingent Valuation Methods” (CVM) • Ask people: “How much is the environmental good worth to you?” • Experimental markets • Typical goal: learn how people think about environmental goods • Two types of experiments • Field • Laboratory

5. Some examples • The value of the Channel Islands marine reserve? • Do people value the organisms or the reserve? • Should DDT plume off of Rancho Palos Verde be cleaned up with state funds? • How large are the wildlife damages from Exxon Valdez spill? • The value of restoring steelhead to Ventura River? • The environmental damage from drilling in ANWR?

6. How elicit “willingness to pay”? • No market exists within which to measure value • Use survey • Many challenges to do a credible job • Several built-in biases that must be overcome • Need to design survey to minimize opportunities for bias of results.

7. Value of solar-generated electricity • Introduction • Explain purpose of survey and how long it will take, importance of truthful answers • Background attitudes • Solar as “green” electricity • Compare to “brown” electricity • Importance of air quality, current opinion about air quality • Have you participated in green markets? • Eliciting value of green electricity • Concept of Renewable Energy Credit (REC) • Would your purchase a REC for $X? (vary X) • Socioeconomic characteristics • Gender, Age, Race, Income, Greenness

8. Example – Seoul CVM Survey Instrument • Introduction – explain purpose of survey and time to complete (30 min) • Request background attitudes and info • What is your opinion about current tap water in Seoul? (very good, good, etc) • In the last five years have you or anyone in your household taken any of these steps to obtain cleaner water? (install water filter, etc) • Value of Water Quality Improvement • Explain major pollution accident in 1991 that contaminated drinking water of Seoul • If the government takes no action, how many times in the next five years do you think we will have a similar accident? • [Give one minute description of continuous monitoring system that will warm your household of contamination] • What is the most your household would pay in taxes for such monitoring? • Background information • Age, education, household size, income

9. Cookbook procedure [1 of 2] • Define the “market scenario” or payment vehicle • “How much are you willing to pay for …” vs. • “Bond issue has been proposed to pay for …” • Determine elicitation method • Direct question, discrete choice, bidding game, payment card, etc… • Design elicitation scheme • Mail, telephone, email, web, in person

10. Cookbook procedure [2 of 2] • Determine sample design • Population, randomization of respondents, randomization of questions, etc. • Determine experimental design • How obtain demand curve and conduct further analysis to answer question • Estimate demand function • Conduct analysis to answer question

11. Problems with CVM • WTA or WTP?…get different answers. • Hypothetical bias • How real is the budget constraint? • Ambiguity about what is being valued • “Warm Glow”—purchase of moral satisfaction? • Open-ended is unfamiliar market context • Embedding problem • Value of one park? Value of suite of parks? • Existence value is a problematic concept since it is unobserved

12. NOAA guidelines for CVM • Minimize non-response • Personal interviews • Pretest for interviewer effects etc. • WTP not WTA • Referendum format • Provide adequate background info. • Remind of substitute commodities • Include & explain non-response option (not $0)

13. Types of payment vehicle • Payment affects all parties • National tax, local tax, fee or charge for use, price increase for use. • Note: respondent may disagree with agency responsible for managing resource. • Voluntary payment • Donation to trust fund • Note: remember free-riding problem, also may get strategic bias.

14. Open-ended elicitation “What is the maximum amount you would be prepared to pay every year [vehicle] to XXX?” • For: • Straightforward, no implied value cues/anchoring bias, gives max WTP • Against: • Large non-response/protest, unrealistically large bids, unreliable, unlike normal market transaction

15. Bidding game elicitation “Would you pay $X every year via [vehicle—tax, utility bill]?” [keep increasing bid until answer is “No” or decrease until “Yes”] • For: • Forces respondent to consider preferences. • Against: • Anchor bias, yea-saying, cannot be used in mail surveys.

16. Payment card elicitation “Which of the amounts listed below describes your maximum WTP every year [using vehicle Y] to improve X?” [list of $ values] • For: • Avoids starting point bias, values can be actual tax or household benchmarks • Against: • Range of numbers can induce bias, cannot be used on telephone.

17. Single-bounded dichotomous choice elicitation (referendum) “Would you pay $X per year using [vehicle] to improve Y?” [randomly vary X] • For • Simplifies choice (similar to market), minimizes non-response, straightforward • Against: • May get inflated values, some yea-saying, less informative, starting point bias.

18. Double-bounded dichotomous choice elicitation “Would you pay $X every year using [vehicle] to improve Y?” [If yes: “And would you pay Z (>X)?”, If no: “And would you pay W (<X)?”. • For: • More efficient than referendum (because know bounds. • Against • Same as referendum

19. Major sources of error in CVM • Scenario misspecification • Divergence between what respondent is answering and what researcher is asking • Implied value cues • Unfamiliar choice problem, respondent wants to give “right” answer. • Strategic bias • Low bid (think taxes will increase but good won’t) • High bid (think won’t have to pay for it)

20. Reliability of CVM estimates • Compare results with comparable revealed preference results (e.g. solar) • Construct market & compare results • Use CVM to measure demand for market good • Test method (same sample over time) • Surveys of purchase intentions and actual purchases (market research)

21. Example 1: Goose Hunting in Wisconsin • Goose licenses limited in number and issued by lottery • Compare three techniques • Travel Cost • CVM • Experimental Methods • CVM WTP and WTA bracketed true value

22. Example 2: ecotourism in Kenya • Ecotourism captures some of WTP for preserving wildlife • Lake Nakuru Nat’l Park in Kenya (360 species of birds) • Farming has reduced water quality and subsequent wildlife pops. • CVM estimates value park (value to users only) at $7.5 million.

23. Example 3: Economic value of noncommercial fish (US) • Rivers in Four Corners region • 2465 miles of river habitat for 9 endangered fish. • Protection requires fish bypasses, passageways, habitat improvements. • What is the economic value of preserving the habitat?

24. The application (Four Corners fish) • Respondents given • Maps of critical habitat • Told that officials thought habitat protection too costly, were going to eliminate critical habitat designation • Asked if they would contribute to “Four Corners Endangered Fish Trust Fund” • Also told all taxpayers would contribute

25. Voting for Four Corners fish • If majority votes in favor of contribution to fund: • Rivers managed for optimum fish protection. Fish will be saved & removed from ESA over next 20 years. • If majority votes against • Rivers managed for maximum hydroelectic output. 4 of 9 would likely become extinct.

26. Actual survey instrument “Suppose a proposal to establish a Four Corners Region Threatened and Endangered Fish Trust Fund was on theballot in the next nationwide election. How would youvote on this proposal? Remember, by law, the fundscould only be used to improve habitat for fish. If theFour Corners Region Threatened and Endangered Fish Trust Fund was the only issue on the next ballot and itwould cost your household $______ every year, wouldyou vote in favor of it? Circle Yes or No.” Dollar value randomly chosen from $1 - $350.

27. Results of Four Corners fish • Survey sent to random sample of 800 Four Corners households. Additional 800 to households in rest of US. • Average WTP = $195. • Extrapolated to rest of population. • Benefits far exceeded costs.

28. Example 4: Value of Waterfalls • FERC faced relicensing. How much water should be required to fall at recreation area? • More water, less power generated. • Previous license required 50 cfs (trickle) • Survey elicited WTP for increased overflow of water.

29. Survey & results: waterfalls • Pictures with different flow levels mailed to random sample of past visitors to site. • How much pay to visit park in each case. How many times visit park? • Result: Summer months optimal flow should be 500 cfs (not 50 cfs).

30. Experimental markets • Main criticism of CVM is that it is hypothetical. • Develop an experimental market, with actual participants to elicit values. • Researcher constructs market, including the good(s) and money • Observe behavior of subjects (may be field or laboratory)